Facts of the case

Alabama imposes a 4% sales tax on the gross receipts of retail businesses and a 4% use tax on storage, use, or consumption of tangible personal property. Accordingly, rail carriers that purchase diesel fuel within the state are subject to a 4% sales tax. However, motor and water carriers that purchase fuel in Alabama pay an excise tax of $0.19 per gallon.

In 2008, CSX Transportation, Inc. (CSX) sued the Alabama Department of Revenue for violating the Railroad Revitalization and Regulatory Reform Act of 1974 (4-R Act), which targeted local and state taxation schemes that discriminated against rail carriers. CSX argued that the sales tax was discriminatory because it required the rail carriers to pay more than their competitors for purchasing diesel fuel in the state. The district court dismissed the case and U.S. Court of Appeals for the Eleventh Circuit affirmed the dismissal by citing precedent that held that a railroad could not challenge its competitors' exemptions from a sales tax as discriminatory under the 4-R Act. The Supreme Court granted certiorari, overturned the ruling, and remanded the case. On remand, the district court conducted a bench trial and issued an order holding that the state's sales tax does not discriminate against rail carriers for the purposes of the 4-R Act, because the amount that motor carriers paid was roughly equal to that paid by rail carriers. The Court of Appeals reversed the lower court's decision and held that the tax is discriminatory because the state had not offered sufficient justification for exempting CSX's competitors from the sales tax.

Question

Does a state violate the Railroad Revitalization and Regulatory Reform Act of 1974 when it requires rail carriers to pay a sales-and-use tax but exempts the railroad's competitors?

In resolving such a claim, should a court consider other aspects of the state's tax scheme rather than focusing solely on the challenged provision?

John G. Roberts, Jr.:

Antonin Scalia:

This case is here on Writ of Certiorari to the United States Court of Appeals for the Eleventh Circuit.

The so-called 4-R Act, the Railroad Revitalization and Regulatory Reform Act of 1976 forbids the state “to discriminate against a rail carrier.”

This case requires us to determine first whether a state violates this prohibition by requiring commercial and industrial businesses, including rail roads to pay a tax while simultaneously exempting railroads' competitors from that tax but not railroads themselves.

If so, we must then resolve whether a state may respond to such a tax discrimination claim by proving that other state tax provisions justify the differing treatment.

Alabama imposes sales and use taxes on diesel fuel.

It applies these taxes to railroads' purchase or sale of diesel fuel for their operations, but exempts two of the railroads competitors; trucking companies which we will call motor carriers and companies that transport goods interstate through navigable waters which we call water carriers.

Motor carriers instead pay a separate fuel tax.

Water carriers pay neither sales nor use taxes on their diesel.

Respondent CSX sued in District Court to enjoin petitioner Alabama from collecting sales and use taxes from it arguing that those taxes violated the 4-R Act (b) (4), a provision that prohibits states and their subunits from “imposing another tax that discriminates against the rail carrier."

The District Court rejected CSX's claimed after a trial and the Eleventh Circuit reversed.

The Eleventh Circuit reasoned that CSX could bring a 4-R Act challenge alleging discrimination as against the railroads' competitors, as CSX did here.

But it also rejected Alabama's response to CSX's claim namely that motor carriers are exempt from sales and use taxes because they pay a different and roughly equivalent tax.

We reverse the Eleventh Circuit's judgment.

We agree with the Eleventh Circuit that the relevant subsection of the 4-R Act subsection (b) (4) permits a claim based on discrimination against a railroad relative to its competitors.

The preceding three subsections of the act prohibit property taxes that treat railroads differently from commercial and industrial taxpayers in the jurisdiction.

Nothing in the ordinary use of the term discriminate implies that discrimination only occurs when a railroad is singled out relative to all other commercial and industrial taxpayers which was the precise comparison required by the first three subsections.

Instead, a tax discriminates against the railroad when it treats a railroad differently from other similarly situated entities without sufficient justification.

We agree that for purposes of the 4-R Act the appropriate comparison for determining whether discrimination has occurred depends on the plaintiff's complaint.

The District Court must then determine if the proposed comparison class is in fact similarly situated to the railroad which is the hard requirement to comply with.

CSX's competitors however surely are.

But the Eleventh Circuit also determined that it could not consider Alabama's tax related justifications for exempting motor carriers and water carriers but not railroads.

On this point we disagree. Just as it does not comport with ordinary English to narrow the term discrimination to only those cases where a railroad complains that it has been targeted as against all other commercial and industrial taxpayers so also it does not comport with that term's ‘ordinary use' to describe two rival industries who pay separate but roughly comparable taxes as being discriminated against.

If that were so, both industries in such a hypothetical case could complain about being discriminated against the other.

Our negative Commerce Clause cases also endorse the proposition that an alternative tax regime may justify a tax that would otherwise be discriminatory.

We do not decide whether Alabama's tax regime subjects railroads and their competitors to roughly equivalent taxes and therefore justifies railroads' different treatment.

We leave that difficult question to the Eleventh Circuit to decide in the first instance.

We acknowledge that the vagaries of state tax law will present challenging cases for Federal Courts but if this burden is Sisyphean, as the Eleventh Circuit called it, it is nonetheless a task that Congress has assigned to the courts.